Professional Documents
Culture Documents
Topic Outlines
3.1 Commercial/Islamic Banks 3.2 Islamic Merchant/Investment Banks 3.2 Takaful Operators 3.2 Islamic Funds Management Company
Learning Objectives/Outcomes
Explain the Islamic financial institution:
Commercial/Islamic banks Islamic Merchant/Investments banks Takaful operators Islamic funds management company
Financial Institutions
Commercial/Islamic Banks Merchant/Investment Banks Finance Companies Takaful Companies Fund Management Companies Cooperative Banks Saving Institutions Pension Fund Economic Development Institutions
History
History
Organization
Commercial/Islamic Banks Merchant/ Investment Bank 1. Dubai Islamic Bank: First commercial bank mandated to operate in adherence to Shariah rules and principles. 1. Evolved when commercial banks were thought off as retail businesses and merchant banks took up the need for wholesome business. 2. Current trend: Merchant banks becoming investment banks. Investment banking is a broader version of merchant banking with discounting possibilities as well. 1. Takaful operations now available in various countries throughout the world (around 40 operators), primarily in Islamic countries and countries with large Muslim population. 2. Industry growth: 10-20% per year. 3. To enhance global takaful infrastructure. ASEAN Retakaful International (L) Ltd. has been identified as one of the vehicles to enhance retakaful arrangements.
Takaful Operators
Organization
Fund Management Companies 1. Fund Management companies manage the fund of their clients 2. Caters for people who either have no time to manage their own funds or are fearful that they do not know how best to manage their funds, or believe that fund managers have the expertise to seek out better yields at lower risk relative to themselves. 3. Within the Islamic sphere, equity funds have been the most popular.
Functions
Commercial/Islamic Banks 1. Islamic commercial banks play the role of intermediaries. 2. Flow of fund is indirect. 3. Funds are bought by offering a variety of deposit products and funds are sold through a variety of financing products.
Merchant/ Investment 1. Historically, merchant banks catered for activities Banks involving large amounts, or amounts too large for commercial banks to handle. Hence their forte was limited to activities such as syndication. 2. The business of merchant banks expended to include underwriting and advisory services. 3. Their fee-based activities became so substantial that deposit taking and loan making, albeit in substantial quantums, became relegated to the sidelines.
Functions
Takaful Operators 1. A type of joint guarantee insurance mechanism where a large group of people pool their financial resources together against certain loss of exposures. 2. Based on principles of co-operation, protection, mutual responsibility and avoid acts of interest and uncertainty. 3. Takaful operators conducts all its affairs in a manner that adheres to Shariah guidelines. 4. Takaful operators do not have policyholders. They contributors or participants, as they are participating jointly in a takaful fund for their mutual benefits. 5. Contributors/participants: Owners of the fund. 6. A takaful operator manages and operates the fund on the participants behalf. In the event a contributor suffers a financial loss, he or she is paid an amount from the takaful fund, in accordance with the basis of underwriting principle of insurance.
7. By signing a takaful contract, each contributor agrees to uphold the spirit of co-operation and mutual solidarity and help each other through the takaful system. 8. Takaful works both as (1) savings instrument where participants set their own target amount to accumulate over a certain period, (2) a protection mechanism in which all participants guarantee each other against events that would alter their financial status. Fund Management Companies 1. Tend to target high net worth individuals and corporate institutions 2. Clients pay the stipulated amount pooled together with the funds of other clients 3. Then, invested by specially trained personnel who are supposed to be able to identify investments with high yields and low risks Shariah compliant investments 4. The fund manager is in a position to diversify the portfolio, lowering risk 5. The returns are distributed to the investors, after deduction of administrative charges incurred in managing the fund
5. 6.
7.
Has a defined period of maturity. Insured persons commonly make periodic level premium contributions. Contributions will be used primarily for meeting their targeted individual savings and partly for assisting their families financially when the insured dies. Contributions amount varies among the insured, depending primarily on the sum (face amount) that each insured targets to accumulate at the end of the coverage period and on the age, gender and health condition of the insured. The takaful operator may set the minimum face amount for this purpose and may also set minimum and maximum age limits for participating in this types of policy. Takaful life insurance is also used for other purposes, including generating funds for childrens education, securing a fund in case of mortgagors death. Several takaful policies now come with hospitalization and disability benefits. There is virtually a counterpart takaful life insurance policy for each major type of conventional life insurance policy, with a difference in how premiums are allocated.
3. 4.
Participants Operator Cooperative, Islamic contracts of Wakala or Mudarbah with Tabarru (contributions)
Sharia compliant, Riba-free
Investments
Interest based
Surplus
Shareholders account
Participants account
Response
In a Hadith narrated by Anas bin Malik, one day Prophet Muhammad (PBUH) noticed an Arab Bedouin leaving his camel untied. He asked the Bedouin, Why dont you tie down your camel?
The Bedouin answered, I put my trust in Allah (SWT). To which the Prophet (SAW) replied, Tie your camel first, then put your trust in Allah (SWT). <Tirmidhi>
Fiqh Council of World Muslim League resolution and Fiqh Council of Organization of Islamic Conference in Jeddah resolved that, conventional insurance as presently practiced is Haram, and that, cooperative insurance (Takaful) is permissible and fully consistent with Shariah principles.
All insurance contracts seek to maximize profits, which takes benefits away from the policy holders
Response
Takaful operators are mutual or cooperative entities and they aim for Community well being and self-sustaining operations.
Under the Takaful Wakalah Model, the surplus in the fund is returned entirely to the policy holders.
All types of insurance are a form of Gambling or Wagering, which is forbidden in Islam
Response
Risk or Uncertainty can be divided into two classes: Pure Risk (involves the possibility of loss or no loss) Speculative Risk (involves the possibility of loss, no loss or gain) Takaful insures only Pure Risks and the claims are paid in the event of Loss to cover repairs, damage, replacement of property, or an agreed fixed sum.
1972
1976
Fatwa issued by Higher Council of Saudi Arabia in favour of Islamic Insurance model.
1977
Development of Takaful in modern times by establishing the first Takaful Company in Sudan.
1979
1979
Establishment of The Islamic Arab Insurance Company in Saudi Arabia which was later relocated in UAE.
1979-80
1981
1983
10
1983
11
Development of Takaful in modern times by establishing the first Takaful Company in Malaysia. Takaful Act, an act passed to provide for the registration and regulation of Takaful business in Malaysia.
1984
12
1984
13
Takaful Islamic Insurance and Takaful Islamic Re-Insurance in Saudi Arabia and Bahrain respectively.
1985
14
1985
15
International Cooperative & Mutual Insurance Federation ( ICMIF ) started interacting with Takaful operators in a proactive manner.
1990's
16
1993
17
1994
18
1995
19
1995
20
ASEAN Takaful Group evolved into ASEAN Retakaful International (ARIL) in Labuan, Malaysia.
1997
21
1997
22
1999
23
1999
24
2000
25
26 27
2002
2003 2003
28
2004
29
2005
30
2005
Takaful Models
Mudarabah Model
The surplus is shared between the participants with a takaful operator. The sharing of such profit (surplus) may be in a ratio 5:5 , 6:4 etc. as mutually agreed between the contracting parties. Generally, these risk sharing arrangements allow the takaful operator to share in the underwriting results from operations as well as the favorable performance returns on invested premiums.
Mudarabah Model
Company
Investment By Company
Participant
Companys Share from Surplus General Takaful Fund General Takaful Fund
Operational Cost of Takaful
Wakalah Model
Cooperative risk sharing occurs among participants where a takaful operator earns a fee for services (as a Wakeel or Agent) and does not participate or a share in any underwriting results as these belong to participants as surplus or deficit. Under the AlWakala model the operator may also charge a fund management fee and performance incentive fee.
Wakalah Model
Company (Capital)
Wakala Fee (30% to 35%)
Profit From Investments Mudarib's Share of PTFs Investment Income
Takaful
Contribution
paid by Participant
Investment Income
Reserves
Surplus (Profit)
The relationship of the participants and the operator is directly with the WAQF fund. The operator is the Wakeel of the fund and the participants pay contribution to the WAQF fund by way of Tabarru. The contributions received would also be a part of this fund and he combined amount will be used for investment and the profits earned would again be deposited into the same fund which also eliminates the issue of Gharar. Losses to the participant are paid by the company from the same fund. Operational expenses that are incurred for providing Takaful services are also met from the same fund.
Wakala-Waqf Model
Company (Capital)
Wakala Fee (e.g. 30% to 35%)
Investment Income Mudarib's Share of PTFs Investment Income
Contribution by Participant
WAQF Fund
Investment Income
Reserves
Surplus (Profit)